Saturday, March 31, 2018

Markets in bail bonds - the limitations of market solutions

The Times carries a very good story on bail bond agents in the US. The $2 bn industry has its business to deliver their clients to court, by charging them with non-refundable fees for the service of guaranteeing their bond and securing bail. The Times writes,

The bond agent takes a fee in exchange for guaranteeing the amount of the bail on the defendant’s behalf. But the fee — or premium — usually about 10 percent, is too high for many defendants, the vast majority of whom are poor. So they arrange a payment plan. The debt, paid over weeks or months of installments, can outlast the criminal case. The arrangement can include steep late fees or require signing over collateral worth many times what is owed. And while defendants, or the family members and friends who often shoulder the costs, typically pay no interest as long as their payments are on time, if they go into default they can trigger annual interest rates as high as 30 percent...

The system has worked well for the industry, even attracting private equity investors. Mom-and-pop bail companies are backed by large surety companies, which guarantee the full amount of the bond in exchange for a portion of the premium. Together, the surety companies and the bail bond agents collect about $2 billion a year in revenue...

As commercial bail has grown, bond agents have become the payday lenders of the criminal justice world, offering quick relief to desperate customers at high prices. When clients... cannot afford to pay the bond company’s fee to get them out, bond agents simply loan them the money, allowing them to go on a payment plan. But bondsmen have extraordinary powers that most lenders do not. They are supposed to return their clients to jail if they skip court or do something illegal. But some states give them broad latitude to arrest their clients for any reason — or none at all. A credit card company cannot jail someone for missing a payment. A bondsman, in many instances, can. Using that leverage, bond agents can charge steep fees, some of which are illegal, with impunity, according to interviews and a review of court records and complaint data. They can also go far beyond the demands of other creditors by requiring their clients to check in regularly, keep a curfew, allow searches of their car or home at any time, and open their medical, Social Security and phone records to inspection. They keep a close eye on their clients, but in many places, no one is keeping a close eye on them.

Such services typically operate in regulatory vacuums,

Bond companies fall into a sort of regulatory gulf between criminal courts and state insurance departments, which are supposed to regulate them but seldom impose sanctions. With rare exception, defense lawyers and prosecutors are too busy with their caseloads to keep bond companies in line. Further complicating things, it is often unclear whether consumer protection laws apply, and insurance departments say they lack the resources to investigate complaints.

And even where the law is clear, enforcement failures is typical of markets which service predominantly the poor,

Though California law appears to be quite clear about what bond agents can charge, a review of more than 100 bail contracts and legal documents by the criminal justice reform clinic at the University of California, Los Angeles, School of Law found that such protections were routinely ignored. The contracts included all manner of additional costs, including late fees, interest on delinquent balances and “renewal premiums” that required the defendant to pay again to stay out of jail if the case was not resolved within a year.

In the final analysis, the logic of market efficiency is elusive,

The entire premise on which the commercial bail system is built — that when defendants skip bail, someone must either find them or pay, is somewhat illusory.

The problem with any private sector based solution to what are essentially public services (bail bond enforcement) is that market failures invariably develop and concentrate around fleecing consumers, skimping on expenditure, creating social costs, stretching the boundaries of the law, and in general cutting corners wherever possible. All these get amplified if the services serve predominantly the poor.

Supporters would argue that the problem is with poor regulation and once it is sorted out, then everything would be fine. This situation is something like saying free-trade is great as long as there is a mechanism to sufficiently compensate the losers. When we know that some assumptions are impractical, it is just as well to acknowledge the failing of the original idea itself!

The point I wish to highlight when I post such examples, as I often do, is not a blanket assertion that markets are bad or ineffective and governments are good. Far from it.

Instead, my point is that the problems that governments typically deal with are complex ones - some people call them wicked problems. It is facetious to then carry the generalised perception that the private sector and markets can solve them more effectively. At best, we can say that market solutions are more likely to be effective in certain limited and specific contexts (or when certain conditions are available) or to address certain parts of the problem. But for the major part these problems are better managed by governments and the focus should be on trying to make public systems manage them more effectively.